Perhaps what is so startling to many is that the current sell-off has unfolded in such a short period of time, which certainly plays a factor in emotional responses toward investing. We have witnessed extreme daily selloffs only for markets to shoot back up the next day as investors grapple with something they have never experienced before. The reason this is different is the discounting mechanism that is the market is struggling to accurately price both the impact and for how long it will last.
Recovery is seemingly dependent on how quickly the coronavirus (COVID-19) is contained combined with effective government support of the economy. Eventually the impact of COVID-19, medically and economically, will dissipate then you are more in danger of missing a rally than making further losses.
What we feel with certainty is that more sad news lies ahead, and we will continue to see more new stories humanizing the impact of the coronavirus, such as the positive tests for the Prime Minister and Health Secretary at time of writing, but we also know that this pandemic shall pass at some point, and we will eventually find our way back to normal. We are here to help remind you not to lose sight of that as we face what news is to come in the weeks ahead and we all need to be prepared for markets potentially falling further and temptations to sell.
Now is not the time to panic though. Selling out now to avoid losses is sadly, probably already too late given markets are already down over 25%. If a sale take place there is also the very difficult decision of when to get back in. Research shows that timing the decision to get back in is just as difficult as timing the decision to get out, and investors are notoriously bad at market timing. Miss time the bottom by a couple of months and a large percentage of a recovery can be missed (typically 15%) miss by six months and this rises to typically 25% - which will be catastrophic on a portfolios ability to achieve client goals.
For example, you may have seen the headlines on Monday 16th March, that the US markets recorded their worse single day selloff since 1987. However, what they didn’t tell you was that 1987 was actually a positive year in the markets.
To an extent equity markets have spoiled investors over the last few years with prolonged market rallies, relatively muted pullbacks, and sustained periods of low volatility. While painful in the moment, significant market drawdowns are fairly common and represent an inherent part of equity investing. In 1974, 1987 and 2009 the market suffered a worse intra year decline than so far today and yet ended the year in positive territory.
Whilst each crisis is different, and we do not know fully how low this will one go; history shows that what previously when markets have been deeply oversold, they have typically rebounded. The main issue here, is likely when?
Technically, equity markets today are exceedingly oversold however it is too early to call a bottom in equity prices. For that we need to see the number of new COVID-19 cases in Europe and the U.S. to first inflect lower.
What’s being done?
At a global level 3 key tools are being deployed big and mostly early:
1) Social – distancing, lockdowns, isolation, working from home
2) Monetary – interest rate cuts, quantitative easing
3) Fiscal – bailouts, tax cuts, spending, benefits, loans to businesses
What we know is that the contagion effect ramps up slowly then goes exponential. Social distancing works to stem that exponential spread so by working from home for example and we can all help. Monetary policy then provides liquidity to keep the financial system working in this time of stress. Now fiscal policy needs to come into effect as a boost to the economy. Governments around the World are announcing massive stimulus packages; tax cuts, bailouts, loans to businesses, tax rebates to individuals, schemes of employees and the self-employed etc. The UK announced a massive cash boost of £330bn for instance and the US and EU have followed suit.
Take good care and stay safe through these unprecedented times.
Recovery is seemingly dependent on how quickly the coronavirus (COVID-19) is contained combined with effective government support of the economy. Eventually the impact of COVID-19, medically and economically, will dissipate then you are more in danger of missing a rally than making further losses.
What we feel with certainty is that more sad news lies ahead, and we will continue to see more new stories humanizing the impact of the coronavirus, such as the positive tests for the Prime Minister and Health Secretary at time of writing, but we also know that this pandemic shall pass at some point, and we will eventually find our way back to normal. We are here to help remind you not to lose sight of that as we face what news is to come in the weeks ahead and we all need to be prepared for markets potentially falling further and temptations to sell.
Now is not the time to panic though. Selling out now to avoid losses is sadly, probably already too late given markets are already down over 25%. If a sale take place there is also the very difficult decision of when to get back in. Research shows that timing the decision to get back in is just as difficult as timing the decision to get out, and investors are notoriously bad at market timing. Miss time the bottom by a couple of months and a large percentage of a recovery can be missed (typically 15%) miss by six months and this rises to typically 25% - which will be catastrophic on a portfolios ability to achieve client goals.
For example, you may have seen the headlines on Monday 16th March, that the US markets recorded their worse single day selloff since 1987. However, what they didn’t tell you was that 1987 was actually a positive year in the markets.
To an extent equity markets have spoiled investors over the last few years with prolonged market rallies, relatively muted pullbacks, and sustained periods of low volatility. While painful in the moment, significant market drawdowns are fairly common and represent an inherent part of equity investing. In 1974, 1987 and 2009 the market suffered a worse intra year decline than so far today and yet ended the year in positive territory.
Whilst each crisis is different, and we do not know fully how low this will one go; history shows that what previously when markets have been deeply oversold, they have typically rebounded. The main issue here, is likely when?
Technically, equity markets today are exceedingly oversold however it is too early to call a bottom in equity prices. For that we need to see the number of new COVID-19 cases in Europe and the U.S. to first inflect lower.
What’s being done?
At a global level 3 key tools are being deployed big and mostly early:
1) Social – distancing, lockdowns, isolation, working from home
2) Monetary – interest rate cuts, quantitative easing
3) Fiscal – bailouts, tax cuts, spending, benefits, loans to businesses
What we know is that the contagion effect ramps up slowly then goes exponential. Social distancing works to stem that exponential spread so by working from home for example and we can all help. Monetary policy then provides liquidity to keep the financial system working in this time of stress. Now fiscal policy needs to come into effect as a boost to the economy. Governments around the World are announcing massive stimulus packages; tax cuts, bailouts, loans to businesses, tax rebates to individuals, schemes of employees and the self-employed etc. The UK announced a massive cash boost of £330bn for instance and the US and EU have followed suit.
Take good care and stay safe through these unprecedented times.
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